Euro holds gains above 1.1400 on hawkish ECB expectations despite US-Iran tensions

EUR/USD posts modest gains near 1.1405 in Wednesday’s early Asian session.
Rising energy costs could rekindle inflation and strengthen the case for further ECB tightening.
Trump minimized the prospect of immediate talks with Iran as the US attacks Iran for the 11th straight night.

Lallalit Srijandorn FXStreet

The EUR/USD pair trades with mild gains around 1.1405 during the early Asian session on Wednesday. A hawkish tone from the European Central Bank (ECB) provides some support to the Euro (EUR) against the US Dollar (USD). Traders await the upcoming ECB interest rate decision on Thursday.

European government bonds rose across the board earlier this week as an enduring geopolitical oil shock and the looming threat of persistent inflation prompted investors to price in a more hawkish path for ECB monetary policy.

While the ECB is widely expected to hold its deposit rate steady at 2.25% at its July policy meeting on Thursday, money markets indicated the ECB deposit rate at 2.66% in December and 2.73% in February 2027, up from the current 2.25%. They also fully priced the interest rate increase in September, according to Reuters.

Meanwhile, US President Donald Trump minimized the prospect of immediate negotiations with Iran as the two sides exchanged strikes and Houthi militants in Yemen threatened shipping in the Red Sea. Trump vowed on Tuesday to respond if the Iran-backed group disrupted that waterway but didn’t specify how.

Iran's top joint military command said that Tehran will expand its strikes and target US and its allies' interests across the region if the US attacks Iran's nuclear sites, per the Xinhua news agency. Escalating tensions in the Middle East could boost a safe-haven currency such as the Greenback and act as a headwind for the major pair in the near term.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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